Global stocks rally but sterling falters on 'Brexit' fear

LONDON - World stocks rallied Monday to extend their recovery after recent turmoil but analysts warned of further volatility ahead as "Brexit" fears rattled the foreign exchange market.

In Europe, the focus was firmly on Britain as sterling plunged to a near seven-year low against the dollar on concerns that Britain could vote to leave the European Union in a June vote. And in a reminder that all was not well within the eurozone either, data Monday revealed a sharp drop in private sector business activity across the single currency bloc.

"A rebound in oil prices and a rally in Asia... has seen European markets rise in early trade as investors attempt to capitalise on the continued positive momentum and move back towards risk that has seen markets rally strongly" in recent sessions, said Rebecca O'Keeffe, head of investment at stockbroker Interactive Investor. "Although the general trend of markets is higher, the sharp moves in both directions seen last week do suggest continued uncertainty and volatility is likely to continue," she added.

In mid afternoon deals, Frankfurt's DAX 30 led the pack, 1.7 percent higher, with the Paris CAC 40 1.6 percent firmer followed by London's benchmark FTSE 100 index which was up 1.1 percent.

Stocks on the Milan exchange meanwhile shot up by more than three percent, buoyed by banking shares. Wall Street edged up 0.95 percent five minutes after opening cheered by a gain in oil prices.

However the International Energy Agency warned that prices were unlikely to budge much higher before 2017.

British Prime Minister David Cameron was gearing up Monday to present parliament with a deal on EU reforms, hoping to win support for his campaign to stay in the bloc after London Mayor Boris Johnson dealt a blow by backing a "Brexit".

The prime minister's speech follows the dramatic announcement Sunday by his Conservative rival that he would back the Leave campaign, despite Cameron having appealed for his support.

"The Brexit discussion is one that will rumble on, but is not the only story in the markets today and certainly not a story that is moving markets outside of the UK," said James Hughes, chief market analyst at traders GKFX. The latest twist in the saga sent sterling falling heavily against the dollar in early afternoon trade to its lowest level since March 2009 -- to $1.4058 -- before recovering slightly. "Certainly, today's move can be attributed to Brexit, and possibly Boris Johnson putting his weight behind that outcome," said Brenda Kelly, head analyst at London Capital Group.

She added that "overall weakness in sterling lately" is owing to signs that the Bank of England is in no rush to follow the Fed by raising interest rates, "as well as a fairly volatile backdrop in equity markets" that has seen a switch into haven investments such as German bonds. But the eurozone economy remains hampered, with private sector business activity slowing sharply in February, a closely watched survey said on Monday, with a warning that the economic outlook could weaken even further.

Data monitoring company Markit said the downbeat data showed stagnation in France and slumping demand in powerhouse Germany were adding to already significant deflationary pressures, which can be very damaging to the economy.

Markit said its closely watched Composite Purchasing Managers Index (PMI) fell to 52.7 points in February from 53.6 in January, hitting a 13-month low.

The reading was still above the 50-point boom-or-bust line, showing the 19-nation eurozone economy continued to expand, albeit at a slower pace.

Earlier Monday, Asian stock markets swept higher, with Shanghai leading the charge after news China had replaced its securities regulator. Chinese shares closed up more than two percent after the head of the securities regulatory body who was in place during last year's market rout was dismissed.